We’ve all seen the headlines: “Apartments Shine as Beacon of Hope” and “Multifamily Sales Defy the Slump.” National newspapers, industry blogs, and local business publications, among others, have joined in a chorus singing the praises of apartment investment opportunities throughout the country.

“Multifamily investments have received a lot of good press over the past several years, and this has attracted more money — and more investors — into the mix,” says Jeff Siebold, CCIM, MAI, owner of Siebold Group Consulting in Caswell Beach, N.C.

Of course, this trend is the result of more than just the media frenzy. “The key [to multifamily’s success] in today’s market is net income or dividend to investors with upside potential, which is creating solid risk-adjusted returns,” says Kenneth P. Riggs Jr., CCIM, CRE, MAI, CCIM Institute’s chief real estate economist and president of Real Estate Research Corp.

And, compared with other sectors, apartments have shorter lease terms that allow for rent bumps as the economy grows. These factors, coupled with a large number of former homeowners entering the rental market, are making multifamily the go-to investment product right now, Riggs says.

For the last few years, apartment investment activity has mostly been concentrated in primary markets. And, in terms of volume and pricing, they’re still leading the pack. New York, Los Angeles, Washington, D.C., Atlanta, and Dallas saw a combined 1H2011 transaction volume of more than $7.9 billion, according to Real Capital Analytics.

The increased competition has pushed average class A capitalization rates in primary markets down to the 4-percent-to-4.5-percent range, with some markets reporting cap rates below 4 percent, according to Marcus & Millichap.

The star sector’s overexposure, manifested in the cap rate compression and the pricing rebound, has kept all but the largest institutional investors and real estate investment trusts from competing for assets in primary markets. And even these investors are now searching for alternatives.

“Some REITs are buying land to build apartments,” says Ben Thypin, RCA’s director of market analysis. “It would be more common if more land were available in markets like New York and San Francisco.”

But since land is a limited resource — especially in densely populated primary markets — multifamily investors have been forced to look for opportunities elsewhere. This is the story behind the story. It might not be garnering a lot of headlines, but it is good news for CCIMs.

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Ben Carlos Thypin

I am currently the co-founder of Quantierra, the world's first data driven real estate brokerage and investment manager. In my former life as Director of Market Analysis at Real Capital Analytics, I worked with press outlets large and small to provide them with great data and insightful commentary. Here are some of the results of this collaboration. For the rest, please check out the News Archive.